Investments for Income Lovers

In this four-part series, I'm taking a look at some of the best investments around for adding yield to your portfolio. In Part 1, I highlighted two top-tier actively managed stock funds that incorporate income generation into their investment approach. Part 2 covered some of the hottest dividend-focused stock ETFs.

Today, I'll turn to the fixed income side of the equation and call out some bond ETFs that any investor can feel confident owning. These are funds that will not only protect your capital and reduce overall volatility in your portfolio, but also provide you with a steady stream of income payments.

Building the basics
Any bond investor should start off his or her fixed income allocation with a solid, well-diversified base of bonds. Since it's incredibly difficult to adequately diversify your portfolio buying individual bonds, broad bond ETFs are an ideal solution. Two of the best options in this space are iShares Barclays Aggregate Bond ETF (NYSE: AGG  ) and Vanguard Total Bond Market ETF (NYSE: BND  ) . With 12-month trailing yields of 2.8% and 3.1% respectively, these funds offer respectable, if not overwhelming, payout potential.

Both options provide exposure to all corners of the domestic bond market including Treasuries, corporate bonds, and mortgage-backed securities. The iShares fund charges 0.22% in expenses while the Vanguard ETF will only set you back 0.11% a year, making either fund a solid choice for price-conscious investors.

Your "core bond" allocation should serve as the anchor of your fixed income portfolio. If you're a more aggressive investor, you might devote 5% of assets to a core bond holding and another 5% to other, higher-yielding bond funds. Investors who are still in the working world but that have less than 10 years to go until they retire might want to bump that up to 20-25% in core bond funds with another 10-15% in alternate fixed income funds. So once you've got your base, it's time to branch out and add some more yield.

Foreign flavor
If you're willing to put up with a little bit more volatility in the fixed income portion of your portfolio, consider adding some exposure to foreign bonds. One good option that combines foreign bond exposure along with protection from future inflation is the SPDR DB International Government Inflation-Protected Bond ETF (NYSE: WIP  ) . That's a mouthful, but what it means is that you get exposure to sovereign debt from developed nations around the world, with some emerging market bonds thrown into the mix, all with an inflation-protection wrapper and a trailing yield of 4.5%. This fund has only been around for three years, but in that time, it has earned an annualized 12.8% return, landing it in the top 1% of all world bond funds.

Investors who really want to get aggressive in the foreign arena can pick up a bond ETF that focuses exclusively on emerging market debt. Funds like this aren't for the skittish but if you're willing to stomach the volatility, a fund like PowerShares Emerging Markets Sovereign Debt ETF can give your bond allocation a shot of power. As its name implies, government debt of emerging nations is the star attraction here, which means that investors are taking on a lot of credit risk. However, used in small doses, the fund's 5.5% yield may offset some of the inevitable volatility investors are certain to encounter here.

The next level
Folks who are already retired will likely want to focus a decent portion of their bond portfolio on inflation-protected securities to keep their purchasing power from eroding. But more moderate and aggressive types may want to further build out the income-producing portion of their portfolio with high-yield bonds.

One option is a high-yielding municipal bond fund like Market Vectors High-Yield Muni ETF (NYSE: HYD  ) , which invests in tax-exempt securities. You won't want to hold this fund in a tax-advantaged account like a 401(k) because you would lose the tax benefits of buying muni bonds, but taxable investors should find a lot to like here, especially given the fund's 12.5% 3-year annualized return and 5.7% 12-month trailing yield.

Another solid high-yield option is the SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK  ) , which comes with a low 0.40% price tag. Investors should tread lightly in high-yield bonds and be prepared for a bumpy ride along the way (as evidenced by 2008 when this fund lost one-quarter of its value), but funds like these are a good choice for investors who want more yield and are willing to take on another helping of risk to get it.

Stay tuned for the final installment in this series where we'll take a look at some more outside-the-box choices for boosting yield in your portfolio.

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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Barclays Aggregate Bond ETF. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 5:00 PM, farfetched1 wrote:

    Your article series is a great find for developing sound starting points.

    Putting standards on transparency is good for folks hoping to have a chance to manage their nest eggs.

    The many fees, and transaction costs along with understanding Risk by use of standards like; Beta or Peg Ratios also matter.

    Rating services, as many use Morningstar, S&P, and a host of other private pay for research report services.

    The idea is if you go with one of the comments of building your IRA effort away from the companies 401k can open an incredible income streams of conservative status investing models.

    One of these models deals with building out a portfolio with good rated bonds such as corporate paper like: AXA SA $ SB NT 8.60000% 12/15/2030 or BANK AMER CORP SUB INTNTS BE 6.12500% 12/15/2027, and/or GENWORTH FINL INC NT 07.70000% 06/15/2020.

    Good dividend additions also need to be employed such as some of these substantial regular payers: AMERICAN CAP AGY CORP COM (AGNC) with the yield, even if it moves down to 12%; is a great stock play, if the price of this REIT wants to go higher. Another play can be ARMOUR RESIDENTIAL REIT INC COM (ARR) or the use of Close End Funds paying a nominal monthly income can be pretty good, if you watch for market downturns to protect the principal of positions taken in each of these issues: (PHK) PIMCO HIGH INCOME FD COM SHS,or (FSC) FIFTH ST FIN CORP COM, and last, (AOD) ALPINE TOTAL DYNAMIC DIVID FD COM SH BEN INT.

    All these combined with a modest portfolio of $135,000 can bring in $1345,00 monthly to subsidize your Social Security.

    These are just ideas being tossed out to the community that if they can help better these positions of gaining income through prudent investing.

  • Report this Comment On February 08, 2012, at 5:20 PM, 13CROSSBONES wrote:

    Is an ETF a replacement for a closed end fund?

  • Report this Comment On February 09, 2012, at 7:33 AM, farfetched1 wrote:

    Close End Funds, (CEF)s tend to be "Steady Eddies" with better track record of payout ratios.

    When it comes to generating a balance between conservative portfolio allocations. Usually many adopt the next few models from what I have tended to use:

    US Large/Mid Cap 11%

    US Small Cap 6%

    International Equity 12%

    ------------------------------

    29% Total

    Fixed Income 56%

    Alternative 5%

    CASH 10%

    -------------------------------

    71%

    Total Allocation Percent - 100%

    When seeking a safer monthly income from your investments. It takes discipline to maintain sticking to your rule of maintaining choices of individual Bonds, CD(s), Choices brought out from the article written by Amanda Tyler.

    I only added the other choices that I have used to achieve a goal of clearer safety while trying to generate pops in dividend flows. AGNC, ARR are higher flyers as to overall safety to PE / PEG, though they have tried to keep a substantial 17% or above dividend. I have kept exposure to these because they have boosted the portfolio income stream nicely.

    The use of the close end funds are just being more selective to achieving the highest in monthly dividend payout and investment issue appreciation.

    This is a good reason to use your own due-diligence. AOD, PHK, PTY, DHY, FSC are but a few in my stable I go to in rotation if markets change the portfolio allocation. I tend to also add the others pointed out from Ms. Tyler's efforts.

    Wish the Many Blessings to the Motley Fool trading community as we all try to do the right things in securing our NEST EGGS.

    J.G.

  • Report this Comment On February 09, 2012, at 3:39 PM, TMFBroadway wrote:

    13CROSSBONES-

    No, I don't generally consider an ETF to be a replacement for a closed-end fund. While both types of funds trade similarly, closed-end funds are actively-managed while the vast majority of ETFs are passively-managed. So picking one or the other would depend on what type of investment philosophy you want to go with. Also, closed-end funds frequently sell at a discount or premium to their NAV (net asset value). That happens only rarely with ETFs, especially more liquid ones.

    Amanda

  • Report this Comment On February 09, 2012, at 3:58 PM, farfetched1 wrote:

    Amanda, very well said!

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